FICA Tax: Where Do Your Social Security and Medicare Taxes Go?

The taxes fund retirement and retirees' medical benefits

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If you work, you are probably aware of the Social Security and Medicare taxes that come out of your paycheck. Most W-2 employee pay stubs itemize the taxes and deductions from your gross pay, and among them you will almost certainly see these two items.

These taxes are part of what is known as the FICA tax, or the Federal Insurance Contributions Act tax, which is a group of payroll taxes that are collected from both the employer and the employee — you, the employee, pay half (which is what you see deducted on your pay stub), and your employer pays half separately.

But do you know exactly where these taxes go?

After federal and state income taxes, FICA taxes (Social Security and Medicare taxes) make up the bulk of other taxes routinely taken out of your paycheck. Once you understand where that money actually goes and what it pays for, you'll understand a significant piece of the American economy.

Where Do Social Security Taxes Go?

The bulk of the FICA tax revenue goes towards funding the United States government's Social Security trusts. These trusts are legally "earmarked," or solely designated, to fund the programs administered by the Social Security Administration:

  1. retirement benefits
  2. survivor benefits
  3. disability benefits

The Social Security tax revenue that is collected from current wage earners (i.e., anyone who has FICA taxes deducted from a paycheck) is put into the trusts, which in turn fund the monthly benefits to:

  1. retirees and their spouses who have qualified for Social Security (retirement benefits)
  1. surviving spouses and minor children of workers who have died (survivor benefits)
  2. disabled workers (disability benefits)

Costs associated with administering the plan also come directly from the trusts, but they're pretty minimal: less than one cent out of every dollar collected pays for administrative costs, according to the Social Security Administration.

The taxes collected can exceed the cost of current benefits. When this occurs, the money is put in the trusts and invested to pay for future program benefits.

These investments allow the United States government to essentially borrow against the surplus to fund other parts of the government. It is this practice (among other concerns about the Social Security programs) that has many worried about the longevity of these Social Security programs. But so far, the government has also repaid its loans from the Social Security trusts — with interest.

Where Do Medicare Taxes Go?

The remainder of the FICA tax money collected from your paycheck goes into the Medicare program, which is the federal program that funds older American's health care costs.

Unlike Social Security, Medicare is also financed through premiums and from the government's general revenue, so it is not wholly dependent on the collection of FICA payroll taxes. Like Social Security, though, the Medicare taxes collected from current wage earners and their employers are used to pay for hospital and medical care costs incurred by current Medicare beneficiaries.

Any excess tax revenue is accounted for in a designated Medicare trust fund.

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